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The board of Legal & General Group Plc (LON:LGEN) has announced that it will be increasing its dividend by 5.0% on the 5th of June to £0.1536, up from last year's comparable payment of £0.146. This will take the dividend yield to an attractive 9.0%, providing a nice boost to shareholder returns.
Legal & General Group's Future Dividend Projections Appear Well Covered By Earnings
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Based on the last payment, earnings were actually smaller than the dividend, and the company was actually spending more cash than it was making. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.
Over the next year, EPS is forecast to expand rapidly. If the dividend continues along recent trends, we estimate the payout ratio could reach 80%, which is on the higher side, but certainly feasible.
View our latest analysis for Legal & General Group
Legal & General Group Has A Solid Track Record
The company has an extended history of paying stable dividends. The annual payment during the last 10 years was £0.093 in 2015, and the most recent fiscal year payment was £0.214. This works out to be a compound annual growth rate (CAGR) of approximately 8.7% a year over that time. The growth of the dividend has been pretty reliable, so we think this can offer investors some nice additional income in their portfolio.
The Dividend Has Limited Growth Potential
Investors could be attracted to the stock based on the quality of its payment history. However, things aren't all that rosy. Legal & General Group's earnings per share has shrunk at 37% a year over the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.
Legal & General Group's Dividend Doesn't Look Sustainable
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. We would be a touch cautious of relying on this stock primarily for the dividend income.